Uk Government Steps In To Take Control Of Stricken Northern Rock

The Age

Tuesday February 19, 2008

By Julia May, London, with agencies

IT IS the nationalisation Britain had to have, in a post-credit-crunch world. The Government became caretaker guardian of stricken mortgage lender Northern Rock on Sunday, after months of indecision over the bank's fate

Emergency legislation was set to be introduced to Parliament to take public control of Northern Rock, five months after news of an emergency #25 billion ($A54 billion) loan from the Bank of England in the wake of the US subprime mortgage market crisis triggered the first run on a British bank since the 19th century.

British Prime Minister Gordon Brown said it was right for the Government to consider private bids to buy the struggling lender before taking it into public ownership.

"The issue before is, was it right to give a chance for private sector solution to be found," Mr Brown said yesterday. "We would have been failing in our duty if we hadn't asked private companies to. We were right to explore all the options.

"We will and always have put the interests of taxpayers first."

Northern Rock's board said it was "very disappointed" with the decision.

"The board hoped that at least one of those options would succeed and is very disappointed that the Government concluded that it was unable to provide funding to support a private-sector solution," the board said in a statement.

Chancellor of the Exchequer Alistair Darling said at a news conference in London on Sunday that two private takeover bids for the bank did not offer taxpayers "sufficient value for money". He said independent arbiters would determine the compensation to be offered to shareholders in the company, whose shares were suspended from the London Stock Exchange yesterday at 90 pence. Ron Sandler, a former Lloyds of London chief executive, was appointed to run the nationalised bank.

At the heart of the plan was Mr Darling's insistence that it would be "business as usual" at the lender until it could be returned to private hands through a sale, and that government guarantees to protect depositors' money remained in place.

He was to announce further details in the Commons. But it is expected to be several years before market conditions will enable a sale, creating a lingering political and financial liability - to the tune of #91 billion on top of the #25 billion already owed to taxpayers - for the Government. Mr Darling told BBC television the Government would remain open to private offers. "At any time . . . if people have got proposals we will listen to them, but they have to pass a simple test - what is the best value for the British taxpayer?" he said.

Shadow chancellor George Osborne said: "After months of dither and delay, we have ended up with this catastrophic decision. We now have the situation where the Government will be making decisions on whether or not to foreclose on people's loans in a falling housing market."

Robin Ashby, of the Northern Rock Shareholders Group, said good bids had been "brushed aside" as politics overtook commercial sense. "I'm shocked and appalled," he said, warning the decision would "do irreparable damage to Britain's reputation as a financial services sector".

But the Government's first proposal in January, to convert Northern Rock's #25 billion loan into government-underwritten bonds before selling them to investors, was shelved after a backlash from the banking sector and shareholder groups. -- With AGENCIES

© 2008 The Age

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